WUSD can avoid its 'fiscal cliff' by borrowing more in bonds

WILLITS - The "good" news on the Willits school district's financial crisis is that the district can avoid fiscal insolvency by borrowing more in bonds to help make a nearly $5 million balloon payment on an earlier bond loan.

That payment, due in July 2014, also would require the use of an estimated $3.7 million in remaining construction monies from the first round of bond sales, which were supposed to be used to build science buildings at Willits High School and Baechtel Grove Middle School.

The loan, known as a bond anticipation note (BAN), is backed by the district's general fund, so without sufficient funds to pay it off, monies used to pay everyday expenses including paying teachers and district staff would be at risk.

The district has three options, when it comes to selling more bonds to make the payment on the BAN, said Lori Raineri, president of Government Financial Strategies, who was hired by the Mendocino Office of Education to do an analysis of the district's bond plan.

Option one is to sell a minimum issue of $1.425 million in regular seven-year bonds, which will require $1.615 million to finance, and give the district only $1,500 of proceeds available to use for projects after paying off the BAN.

If the district borrows the maximum it is allowed in regular bonds--$1.65 million it will cost $1.87 million to finance, but will garner $222,000 in proceeds for the district to use.

The district needs to find some cash to fill in the fenced-in hole in the middle of the WHS campus where the science buildings were to be built.

A third, very expensive option would be for the district to issue an extra $1.655 million in controversial capital appreciation bonds in addition to the $1.65 million in regular bonds, leaving the district $1.8 million in proceeds to use for projects. Selling that extra $1.655 million in capital appreciation bonds would require eventual repayment of $17.655 million, a repayment ratio of 10.7:1.

According to the current district administration, the $4.97 million balloon payment "just came to light," and nobody in the district office or on the school board at the time has acknowledged knowing they'd signed on to the big lump sum repayment.

But according to a June 16, 2010, Willits News story, "Kubin cautious on bond sales," the risks of taking out a bond anticipation note in an environment of declining property values were known at the time by the district administration, if not fully understood by the district or the school board.

The district took out the BAN on the advice of its then-financial advisors Caldwell Flores Winters, with the understanding it would be paid off by future bond sales. On June 16, 2010, only a week after Measure B passed in the June 8 election, Greg Kato of CFW told trustees: "Essentially, by issuing these?bond?anticipation?notes, you are taking the $5 million you would be spending in 2015, and spending it now. There is probably going to be inflation in construction over the next five years and so, by selling it now, you are probably going to be able to get more now."

But the district has been working under the understanding that the next round of bond sales wouldn't take place until 2017. It was County Auditor Meredith Ford, responsible for collecting enough taxes to meet the obligations of all the county districts, who first queried the district office back in July about the upcoming balloon payment.

"We were all duped, taken, swindled!," said interim school board chairwoman Cynthia Carni, at last Thursday's study session on the district's financial problems. "Caldwell Flores Winters, and CFW President Ernesto Flores in particular, did a horrendous job for Willits students, the community and taxpayers."

Raineri called the assumptions CFW presented for the entire bond plan "flawed" and described the $43 million in bond sales authorized by Measure B as "far exceeding" the district's actual bonding capacity. Bonding capacity and taxing capacity are two different factors when it comes to issuing bonds.

The flawed assumption that has already increased district residents' property taxes four-fold was an assumption that property values in the district would increase 4 percent every year from June 2010, when the bonds were sold. In reality, property values have dropped an average of 2.97 percent a year since the bonds were sold, leaving the total property value far below what was required to sustain the annual $29 per $100,000 of assessed value payments promised in the campaign materials for Measure B.

With every resident having to pay more, to make up for a lower total, the district is currently very close to the statutory limit of how much it can tax its residents.

Raineri said her initial look back at the paper trail of how the bonds were approved shows "very little" information or discussion about the BAN. "I'm not saying people weren't told,' she said, "but pulling out all the information, there was a lot of material, but very little about the BAN."

Another aspect of the initial bond issue just getting now some attention is that, unfortunately, it included $3.787 million of very expensive capital appreciation bonds. Raineri explained to the about 50 people present at the study session how CABs work: there are no payments made on the borrowed principal or interest for decades, allowing low initial debt repayments but leaving a huge debt for future generations to pay.

"It's just like letting your credit card ride," Raineri said. "You end up paying interest on interest." But a credit card requires at least a minimum payment, while CABs do not. The payment for the $3.787 million in bonds Willits has already borrowed will be about $40.5 million by the time the bond is paid off in 2041.

The Willits News' stories about the bond authorization and sales in 2010 never included the phrase "capital appreciation bonds," although they detailed other kinds of bonds the district would be selling. A quick look at the school board's agendas and minutes also show no mention of the controversial bonds.